Natural gas boom and the quest for energy problems solution

Energy is an essential factor for sustainable development and poverty eradication. The Johannesburg Plan of Implementation (JPOI), adopted at the World Summit on Sustainable Development in 2002, addresses energy in the context of sustainable development.

Among other things, the JPOI calls for action to: (1) improve access to reliable, affordable, economically viable, socially acceptable and environmentally sound energy services; (2) recognise that energy services have positive impacts on poverty eradication and the improvement of standards of living.

Reliable and secure electricity supplies available to the masses underpin economic growth and community prosperity. Indeed, in 2015, the World Bank reported that more and more countries are becoming increasingly dependent on reliable and secure electricity supplies. This reliance is set to grow as more efficient and less carbon intensive forms of power are developed and deployed to help decarbonise economies.

Exploitation of natural gas has always been seen as a quick way to solve the current energy problems. Natural gas is one of the cleanest burning fossil fuels with a considerably lower carbon foot print than coal and oil. It can be used for industrial purposes, electricity generation, residential and commercial enterprises.

With an estimated 55 trillion cubic feet of natural gas reserves that are expected to rise in future, Tanzania is now firmly on the world energy map as a hot spot for the global energy industry. The country has the potential to become a liquefied natural gas (LNG) exporter. Based on BP’s energy outlook 2017, natural gas consumption in industry and power will grow at a rate of 1.6 per cent p.a between 2015 and 2035. Import dependence is expected to grow in China and Europe, with the latter’s domestic production set to decline sharply by -3.2 per cent as existing mature fields are not replaced. This signals a potential future export market for Tanzania’s LNG.

However, there are a number of challenges that need to be solved for this dream to come true. Cost of developing new found commodities is usually a detrimental factor to host countries that lack financial muscle hence the need to attract Foreign Direct Investment (FDI). As Tanzania is entering a new stage (i.e., Host Government Agreement (HGA)), there are still questions as to whether $30 billion is a true forecasted cost for the LNG plant development. What price does the government have to pay in order to make meaningful decisions?

Before holding the government accountable of its tax payer money we need to accustom ourselves to some of the cost drivers this project is going to face. The cost of liquefaction plants is normally expressed as a metric cost in tonne per annum ($/tpa) and calculated as the cost of the plant in millions of dollars over the liquefaction capacity in million tonnes per annum.

According to Wood Mackenzie data, the metric cost increased dramatically to an average of $1,200/tpa for projects executed in between 2011 and 2015 as compared to $300/tpa in 2000 as plants increased in size.

The level of complexity of executing the project increases with the lack of infrastructure and remoteness of the project location, driving the overall project cost significantly higher. Other cost drivers are: project scope, project complexity, location, equipment and materials, engineering and project management, contractor profit and risk, owner’s costs, contract strategy and currency exchange risk.

LNG plant cost escalations is a key challenge to be solved for the project to be regarded compelling. For major liquefaction projects the likely overall schedule is 10 years where construction normally takes 4 years. Tanzania faces a major task of exercising care in estimating the project costs and creating a favourable environment that will lower complexity and minimise major local cost drivers. The cost of the LNG plant could be reduced through the usage of an alternative liquefaction method such as the Black & Veatch PRICO process technology which offers the lowest capital cost of all competing technologies, allows rapid startup and a simplified control system.

This could involve utilizing Chinese contractors in specialized work and promote local content through the provision of manpower and involvement in the supply chain. According to the Oxford Institute of Energy Studies, the PRICO process is optimised for smaller production at around 1.2-1.5 mtpa but higher capacity could be provided as multiple units. Moreover, the country should make the point of using standard and simple design to keep complexity and cost low.

Competitive advantage of the commodity can only be attained through cutting cost, improving resilience and reducing risks in relation to LNG development. A country strategy should be put in place towards the future of this sector after LNG project completion, which should include the following: 1) A review of the current energy mix through consistent tracking and obtaining of data on country wide energy usage since energy usage is closely associated with social and economic development. 2) Developing a domestic gas reservation policy, this will provide room for a strong domestic market for the commodity. 3) Issuing of a state mandate that will ensure a certain percentage of the country’s future energy mix is gas. 4) Provision of incentives that will attract investment in the natural gas downstream sector. Lastly, formulating policies that will allow flexible gas purchasing agreements for the domestic market as well as LNG exports based on international micro-economics.

Looking forward, planners and policy makers must understand the role of gas as an alternative source of energy and quickly implement proper solutions that will leverage its exploitation, energize the national economy and potentially restore a positive balance of trade to the benefits of the people of Tanzania.

Arthur G. Kanza Recent MBA Oil & Gas Management graduate Robert Gordon University, UK. Email: [email protected]